Political Science

*Private Governance*

by on July 28, 2015 at 2:47 pm in Books, Economics, Political Science | Permalink

The author is Edward Peter Stringham and the subtitle is Creating Order in Economic and Social Life.  I haven’t looked through this book yet, but I am very much an admirer of the underlying research by Ed.  Here is Peter Thiel’s blurb:

“Stringham dispels state-worshipping fiction with historical fact to show how good governance has preceded Leviathan, ignores it when necessary, and can surpass it when it fails.”

Peter Thiel, Entrepreneur

Recommended.

Everyone wants to find a version of history under which all the problems of the Eurozone are Germany’s fault, because everyone knows that all the solutions involve Germany paying. But it’s not really true; Germany spent the early years of ERM/EMU paying far more than anyone else was prepared to in order to smooth the adjustment path for the former Communist states. And after fifty years of structuring everything in Europe to prevent German hegemony, is it really a big surprise that Germany isn’t well set up to act as a hegemon? Imagine if the USA had lost the war in the Pacific and was today being blamed for its failure to ensure the economic development of the Phillippines.

That is from Daniel Davies, there are other good points at the link.

They are not good, as evidenced by a new paper by Buggle and Nafziger (pdf):

This paper examines the long-run consequences of serfdom in the countries of the former Russian Empire. We combine novel data measuring the intensity of labor coercion on the district level in 1861 with several intermediate and present-day outcomes. Our results show that past serfdom goes along with lower economic well-being today. We apply an instrumental variable strategy that exploits the transfer of serfs on monastic lands in 1764 to establish a causal link between past serfdom and current economic development. Tracking the evolution of city populations throughout Soviet times corroborates the finding of persistent economic differences. Furthermore, our results suggest a political economy mechanisms linking higher historical economic inequality with worse public goods provision (roads and education), as well as lower urbanization and structural change towards factory production, as explanation for this persistence. We do not find differences in contemporaneous cultural attitudes and preferences.

The pointer is from Pseudoerasmus.

Arresting the central bank’s governor. Emptying its vaults. Appealing to Moscow for help.

These were the elements of a covert plan to return Greece to the drachma hatched by members of the Left Platform faction of Greece’s governing Syriza party.

That is from the FT, and there is more:

The plan demonstrates the apparently ruthless determination of Syriza’s far leftists to pursue their political aims — but also their lack of awareness of the workings of the eurozone financial system.

For one thing, the vaults at the Nomismatokopeion currently hold only about €10bn of cash — enough to keep the country afloat for only a few weeks but not the estimated six to eight months required to prepare, test and launch a new currency.

The Syriza government would have quickly found the country’s stash of banknotes unusable. Nor would they be able to print more €10 and €20 banknotes: From the moment the government took over the mint, the European Central Bank would declare Greek euros as counterfeit, “putting anyone who tried to buy something with them at risk of being arrested for forgery,” said a senior central bank official.

“The consequences would be disastrous. Greece would be isolated from the international financial system with its banks unable to function and its euros worthless,” the official added.

For all the flaws of the euro, the case for it has never been made more effectively.

Rolls-Royce will be celebrating Singapore’s 50th year of independence with a special bespoke luxury car, the first time the carmaker has commissioned a car to celebrate the anniversary of a country.

Based on the Ghost line of vehicles, the limited edition “SG50 Ghost Series II” bears the red and white colors of Singapore’s flag. The white exterior will feature red trim, while the interior seats are dark red in color, with the city’s iconic half-fish, half-lion Merlion symbol stitched into the four headrests.

Unfortunately only one model will be released for sale, for $290,000.  And that is not all:

Singapore’s independence day falls on August 9, and is slated to be the country’s biggest anniversary celebration ever. Other brands that have released special products to mark the day include Jaeger-LeCoultre’s Singapore Special Edition watch, a Singapore Airlines plane bearing a special motif, and Ayam Brand’s specially designed sardine cans.

The story is here, and perhaps I will be blogging Singapore a bit more as the country’s fiftieth anniversary approaches.  Who would have thought?

I mean that question quite um…seriously.

Paul Krugman, who I believe originated the concept, recently defined it as follows: “…someone distinguished by his faith in received orthodoxy no matter the evidence.”  I would rather have something less normative and also more specific.

I think of it this way: the People are Very Serious if they realize that common sense morality must, to a considerable extent, rule politics.  At least if voters are watching.

So what is common sense morality in this context?  It embodies a number of propositions, including, for instance (with cultural variants across nations):

1. Political decisions should be based on what people and institutions deserve, based on their prior conduct and also on their contributions to the general good.

2. Economic nationalism.

3. Traditional morality, based on respect for authority, repayment of debts, savings, and hard work.

4. Inflation is bad, in part because it violates #1 and #3, and in the case of the eurozone it often violates #2 as well.

5. “I don’t care what you all say, the government should be able to find some way of arranging things so that I don’t have to suffer too badly from this.”

Now here’s the thing: common sense morality very often is wrong, or when it is right that is often with qualifications.

Therefore at the margin there is almost always a way to improve on what the Very Serious People are pushing for.  The Very Serious People realize this themselves, though not usually to the full extent, because they have been cognitively captured by their situations.  They see themselves as “a wee bit off due to political constraints,” instead of “a fair amount off due to political constraints.”  So there is usually some quite justified criticism of the Very Serious People.  Common sense morality is needed at some level, but still at the margin we wish to deviate from it.

That said, it is a big mistake to try to throw the Very Serious People under the bus.  The Very Serious People understand pretty well how to deal with a public which believes in some version of 1-5, and furthermore they often know that such public beliefs, whatever their limitations, are useful too.  Anyone else trying to manage the situation may come up with some favorable breakthroughs, but also may make a total hash of it, as was the case with Syriza.  Syriza failed to realize the import of 1-5 for both domestic and foreign politics,and so they drove the Greek economy to the point of total desperation.  There is a nested game going on, where the public has a big say on the heavily publicized issues, and the politicians must in some way heed that.

If you want to try the “replace the Very Serious People” game, and assume the subsequent risks, that is a judgment which can be made.  The mistake is to think that the partial wrongness of the Very Serious People is necessarily a reason to take matters out of their hands.

Addendum: Via Tim, here is the entry on Very Serious People on RationalWiki, it seems Atrios first put forward the concept.  And here are the remarks of Tsipras.

The authors are Nobel Laureates George A. Akerlof and Robert J. Shiller and the subtitle is The Economics of Manipulation and Deception.  It’s a popular take on how markets trap you and your preferences in places you don’t want to be.  Self-recommending of course.

There are chapters on advertising, tobacco, alcohol, junk bonds, credit cards, pharmaceuticals (some), and yes government.  My main complaint about the book is that its chooses easy targets and doesn’t puncture enough sacred cows.  For instance the chapter on government criticizes spending money on lobbying, whereas I would have preferred an attempt to show that an apparently beneficial and popular institution is in fact bad and appealing to the weaker elements in our preferences.  I wonder to what extent what the authors call “The Resistance and its Heroes” is in fact another example of…phishing for phools.  In other words, I wish this book were more Hansonian.

By the way, I have never eaten too much ice cream.

Mr Rouhani’s cabinet boasts more American doctorates than Mr Obama’s.

There are some more general remarks on Iran here.

The behavioral economics of government behavior remains a drastically underexplored field.  I recently received this email (excerpted) from the Brookings Institution:

In Behavioral Public Choice: The Behavioral Paradox of Government Policy, Gayer and Viscusi analyze several recent regulations, finding that many government actions are in fact also subject to bias.  Regulatory agencies have recently relied upon behavioral economics, a relatively new economics field, which identifies cognitive limitations and psychological biases that lead people to make choices that cause self-harm, thus suggesting a justification for government intervention.  However, Gayer and Viscusi develop an framework of “behavioral public choice” that recognizes that government officials are also subject to behavioral anomalies and to public choice incentives that can further lead to welfare-reducing or harmful policies. They document several government policies that institutionalize rather than overcome behavioral biases, as well as regulations that justify inefficient mandates “based on weak or nonexistent evidence of consumer irrationality.”

For example, the Environmental Protection Agency, the Department of Energy, and the Department of Transportation have recently justified mandating energy-efficiency standards for durable goods (cars, appliances, etc.) based on the assumption that consumers (irrationally) do not take into account future cost savings from buying an energy-efficient product. Yet the agencies offer little or credible evidence that consumers are persistently irrational in their purchasing decisions for energy-consuming products. The authors note that this approach to justify regulations based on weak evidence of consumer irrationality “illustrates a key negative consequence of misusing behavioral findings: the welfare loss associated with ignoring heterogeneous preferences.”

That is the latest development, albeit not the final word:

Should no deal be forthcoming, the German government has made preparations to negotiate a temporary five-year euro exit, providing Greece with humanitarian aid while it makes the transition.

An incendiary plan drafted by Berlin’s finance ministry, with the backing of Angela Merkel, laid out two stark options for Greece: either the government submits to drastic measures such as placing €50bn of its assets in a trust fund to pay off its debts, and have Brussels take over its public administration, or agree to a “time-out” solution where it would be expelled from the eurozone.

Finland, the Netherlands, and Slovakia, among others, don’t seem keen to have Greece continuing in the eurozone.  And so yet another “final deadline” is approaching…

Murat Iyigun has a new book out titled War, Peace & Prosperity in the Name of God.  I haven’t read it yet, but Timur Kuran’s blurb seems helpful:

“Challenging many prominent theories of human history, this captivating book shows that competition among the world’s leading monotheistic religions was a more powerful driver of development than competition within them. Cogently argued, insightful, and entertaining throughout, it demonstrates that struggles between Islam and Christianity produced momentous transformations not only in Muslim-governed lands but also in Europe.”

From his Facebook page:

I am angry Mr Tsipras, because let’s face it. We have been sleepwalking towards a Grexit. For five years now. And the past months we are even running towards it, with our eyes open.
With your eyes open. But, it is not you who is going to pay the bill. Who is going to pay the bill are the ordinary Greeks! Losing 30 – 40 per cent of their purchasing power, of their income.
I am going to be very clear today on what we have to but especially what you have to do. And you know it very well, from the beginning. You have to deliver a package of in depth structural reforms. And when I’m talking a package, I am talking about a precise plan. A roadmap. A clear calendar. No more intentions. We are 6 months after the elections and we have seen nothing.
Do you want a Grexit maybe? It is certainly not what your people want.
What Greece needs are
– concrete proposals to get rid of the clientelistic system. And concrete measures to fight corruption.
– a roadmap to dramatically downsize the public sector: we need to see the exact number of civil servants that won’t be replaced.
– to transform the public banks into a healthy private financial sector
– to open the markets and jobs currently closed for too many young people.
We need to see an end date on when this is going to happen. also here no intentions We need to see the texts of the legal proposals, calendar, legislation.
– to end the privileges of the shipowners, the military, the orthodox church, the Greek islands and not to forget the politcial parties, including yours because you also have the loan of a public bank. I do not see the difference between you and Samaras, physically yes, but not on the content on the substance.
Another difference is that you have a mandate. Never there was a Greek prime minister with such as strong mandate. A double mandate. One in the parliamentary elections. One from the referendum.
The Greek people are fed up with the way Greece has be run the last decades. Change it!
But we also have our responsibility. The euro group need to respond to it with a new approach. We need to create what every currency union has: a real political and economic union. With a debt redemption fund for everybody, every member state not only for Greece. Like it exists in every sustainable currency union.
Mr Tsipras, but first thing first. You have to come forward with your reform program. This is not a chicken and the egg discussion.
It is your choice.
How do you want to be remembered? As an electoral accident who made its people poorer? Or as a real revolutionary reformer?
Don’t fall in the PASOK trap. Don’t betray your people.
Because 80 percent want to stay in the euro.
Show that you are a real leader and not a false prophet.
(My speech in the Eplenary this morning)

The pointer is from the heroic Hugo Dixon.  And here is Guy on video, via Michael Creswell.

I don’t mean this to apply to any specific country, but the recent reaction of Chinese policymakers to their stock market crash got me thinking.

Imagine two equilibria.  In the first, repression is harsh.  Policymakers don’t have to do such a good job with the economy, because they keep their jobs no matter what.

In the second equilibrium, people recently have come out of the first equilibrium, and so they do not trust policymakers very much.  They judge policymakers by outcomes, and so policymakers feel compelled to perform and to deliver high rates of economic growth.

When the tailwinds are positive, political stability is fairly high and policy is good and growth is robust too, the best of all possible worlds.   Policymakers take a long-term perspective because the favorable tailwinds still enable them to meet the expectations of the citizenry, and the long-term perspective keeps them in power for a while to come.  Of course you can think of catch-up growth, and the seizing of low-hanging fruit, as one form of positive tailwinds.

But recall that the “citizen trust contract” with policymakers is ultimately a fragile one and based on a series of quite short-term evaluations.  When the tailwinds are less positive, the policymakers must take on a much shorter time horizon.  They will prop up stock prices now, or try to, even if that is foolish.  They are quite afraid to show their impotency as policymakers in some realms, for fear of looking weak more generally.  Their favorable performance in the previous periods was in fact based on relatively modest levels of talent advantage, relative to other potential leaders, and so they are reluctant to see the citizens asking so many questions.  They want to keep all of the economic reports positive, rather than look like people who would allow 80 million citizens to lose most of their savings.

But avoiding the unpleasant outcome is not possible, and so these bad policies in turn make the tailwinds yet more negative.  An unwinding begins, as both policies and outcomes become less positive, and the contract with the citizens is based on actual trust less and less.

The same leadership structure can perform either very well or very poorly, with both the same leaders and the same citizens.  And the switch can come fairly quickly, and be occasioned by events which are significant but not transformative on a world-historic or even a country-historic scale.

But fortunately this is a model only, and as well all know, models are false.

Addendum: Here is Christopher Balding on recent developments in China.  But he seems to be more worried since he wrote that post.  At the moment, trading in 89% of the stocks on the Chinese market is halted.  My own tweet was: “One subtext is how much the 2008 crash caused Chinese loss of faith in the USA.”

That is the topic of a new Mercatus study by Eileen Norcross.  The five in best shape?:

Alaska, North Dakota, South Dakota, Nebraska, and Florida.

The five in the worst shape are:

Illinois, New Jersey, Massachusetts, Connecticut, and New York

From the FT:

He was replaced by Euclid Tsakalotos, an Oxford-educated Marxist who is considered more pragmatic than the hardline Mr Varoufakis.

And this:

Mr Tsipras also persuaded other Greek political leaders, following seven hours of talks, to back a joint statement that Sunday’s rejection of bailout terms was not “a mandate of rupture” with the eurozone.